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Housing becoming less affordable

Stubbornly high prices and modestly increasing mortgage rates means an increasing number of Canadians are unable to comfortably afford homes, according to Royal Bank of Canada.

In its quarterly housing affordability report, the bank’s economists said that while the number of sales fell significantly in the second quarter, fewer listings meant prices did not decline. And small increases to mortgage rates meant more money was directed toward ownership costs.

“Home prices still carried upward momentum fuelled by the impressive rebound in home resales last year when market conditions clearly favoured sellers,” the report stated. “While housing demand has cooled considerably since winter, a matching decline in homes available for sale has kept markets in Canada sufficiently tight to allow further modest price increases.”

The report said most Canadian cities don’t appear to be at risk of a U.S.-style crash, but “current levels of affordability suggest some greater than usual stress weighing on Canadian home buyers.”

The RBC Housing Affordability Measure shows the proportion of median pre-tax household income required to pay the principal and interest on a mortgage, property taxes and utilities. The figures assume a 25 percent down payment and a 25-year loan at a five-year fixed rate.

In the second quarter, homes became 2.1 percent less affordable on its scale.

The data shows Canadians spent 48.9 percent of their household income to service the mortgage on a median two-storey home, an increase of 2.1 percent over the first quarter.

While most cities are still below historical highs, Vancouver is showing “red flags.”

“Generally, we have dismissed the case of housing market bubbles in Canada, but the situation in Vancouver is probably the closest to one in the country,” the report stated.

A summary of the bank’s results for each market:

Vancouver: “Poor affordability likely contributed to the steep drop in housing resales since the start of this year in the area (although other factors have probably dominated). While the Vancouver market is clearly vulnerable to a price correction, this does not imply that a collapse is imminent because supply (both in the existing and new home sides of the market) is well contained at this point.”

Calgary: In the second quarter, prices actually fell for most housing types. The upside has been a further lowering in the costs of homeownership in the city. Bucking the general Canadian trend, housing affordability in Calgary showed some slight improvement in the second quarter.

Toronto: The high-flying Toronto market could no longer defy gravity this spring and has come down to earth in the months since then. While the earlier lofty levels were clearly unsustainable, the wild downswing that followed could have caused some drama for the Toronto area’s property values; however, a prompt retreat on the part of sellers has kept the demand-supply equation in balance. Home prices have thus largely resisted any emerging negative forces. The deteriorating trend in Toronto’s housing affordability continued.

Ottawa: The spring was a rude awakening for the Ottawa area market, which had shown tremendous resilience and strength during the volatility of the past two years. Affordability levels are moving closer to all-time highs for the area (although these are low by national standards), and this could well become a prominent factor deterring buyers going forward.

Montreal: The Montreal housing market has long been known to be quite affordable by big city standards. While its cost of homeownership remains far less expensive – both in dollar terms and relative household income – than Canada’s priciest markets Vancouver and Toronto, it has risen substantially in the past decade. In fact, Montreal has become increasingly more expensive compared with the national average, including further divergence in the past year. By the city’s own historical standards, affordability has reached poor levels.